Monday, June 18, 2018

Boom Times with Rising Retail Sales, Inflation

The Mortgage Corner

Retail sales jumped 0.8 percent in May which easily tops economists’ estimates. And the results include an upward revision to April which now stands at a 0.4 percent gain, according to Econoday. It is in part due to rising inflation, as the retail Consumer Price Index also jumped and retail sales make no corrections for inflation.

This illustrates just what a booming economy should look like after many years of low or no inflation since the end of the Great Recession. Consumers increased their demand for goods and services because they felt more prosperous, and also see prices rising or about to rise. It’s not abnormal to see 4 to 5 percent retail inflation when an economy is booming—something that hasn’t been the case for any stretch since the end of the Great Recession.

“The retail report shows balanced gains including a 1.3 percent jump at restaurants and a 0.5 percent increase for motor vehicles, both pointing to rising discretionary demand. Building materials,” said Econoday, “which have been soft, surged 2.4 percent in what will be a plus for residential investment. Department stores have been very weak but have now put together back-to-back gains of 1.5 percent in May and 0.7 percent in April. Clothing stores, at 1.3 and 1.2 percent, have likewise bounced back with sizable gains the last two months.”

Graph: Econoday

Year-on-year consumer prices are up 2.8 percent, and core inflation without gas and energy fluctuations is up 2.2 percent. The overall culprit was rising gas prices, as a barrel of oil is now in the mid-$60 price range. Gasoline jumped 1.7 percent in the month outside of which most other readings are modest-to-moderate. Rent rose 0.3 percent in the month as did owners' equivalent rent while medical care, outside of a spike for related commodities and hospital services, remains largely flat.

There are other factors that cause prices to rise faster, such as plentiful jobs, and consumer confidence, which has been soaring for a year. The Conference Board’s Consumer Confidence Index came in at a very strong 128.0 in May which is just below expectations but up from a downward revised 125.6 in April. 

Significantly more consumers say jobs are currently plentiful, at 42.4 percent vs April's 38.2 percent, and about the same say they are hard to get, at 15.8 vs 15.5 percent. Expectations also moved higher, up 1.3 points to 105.6 with sizably more, at 19.7 percent vs April's 18.6 percent, seeing more jobs opening up in the next six months, reports the Conference Board.
“Consumer confidence increased in May after a modest decline in April,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions increased to a 17-year high (March 2001, 167.5), suggesting that the level of economic growth in Q2 is likely to have improved from Q1. Consumers’ short-term expectations improved modestly, suggesting that the pace of growth over the coming months is not likely to gain any significant momentum. Overall, confidence levels remain at historically strong levels and should continue to support solid consumer spending in the near-term.”
This is the picture of a booming economy, with all cylinders firing. But inflation is rising sharply and a trade war will create even more inflation. So what happens with the Fed and interest rates, if inflation continues to rise? The Fed Governors are saying at least 2 more rates hikes may be necessary, if inflation continues to rise more than moderately.

Harlan Green © 2018

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